Oil Stocks HAL, SLB & BHI Show That Going Global Is Key

by Aaron Levitt | January 28, 2014 12:54 pm

With a variety of oil stocks reporting full-year 2013 earnings, unconventional assets are the gifts that keep on giving for the oil service trio of Halliburton (HAL[1]), Baker Hughes (BHI[2]) and Schlumberger (SLB[3]).

Source: Flickr[4]

Overall, the three oil stocks saw huge bumps in their yearly and fourth-quarter profits — the bulk of which have been driven by energy firms diving deeper into shale and deepwater resources.

Yet the geography of those higher earnings might surprise some investors.

While the shale revolution is alive and well here in the United States and Canada, the real name of the game for HAL and SLB stock has been growing overseas demand. Like the U.S., drilling in international unconventional resources has been surging as of late and could represent a huge shift in energy markets.

For investors, that shift toward more profits coming from international earnings could be the best reason to place your bets on oil stocks including SLB, HAL and BHI.

Service Oil Stocks Barely Breaking Even

At this point, the fracking revolution in the United States isn’t a secret. Energy firms continue to plow head-first into various shale resources[5] and unearth a virtual ocean of oil and natural gas. However, that has posed a slight problem for our oil stock trio.

There’s simply an oversupply of certain “services” in the North America. Specifically, pressure pumping.

To frack a well, an energy company basically sends a mixture of water, chemicals and sand down the hole under great pressures. That solution “cracks” the rock and sends the oil/natural gas upward. Unfortunately, the hydraulic fracturing revolution has spurred many oil service firms to ramp up their pressure pumping offerings, essentially creating a glut of pump trucks. Over the past few quarters, SLB, HAL and BHI have all felt the sting of oversupply, and many service-based oil stocks are barely making any sort of returns on these assets right now.

Contract driller Nabors (NBR[6]) CEO Anthony Petrello perhaps said it best when he noted to analysts[7] that “It is not unusual to bid frac jobs against 20 other pumpers, and sometimes as many as 35 show up.”

Where Oil Stocks’ Profits Lie

For SLB, BHI and HAL stock, the key is their global focus.

Halliburton currently receives only about 50% of its revenues from North America. Likewise for Baker Hughes. Meanwhile, Schlumberger only generates 30% of its business from North America. That fact helped the three all report stellar earnings this past quarter.

HAL saw a 31% jump in profits and 5% gain in revenues for the quarter[8]. Overall, Halliburton managed to report a $770 million profit (90 cents per share) in the fourth quarter as well as $7.64 billion worth of revenue. HAL owed the win to increased drilling in Mexico, Argentina and Asia.

That follows BHI’s record profit increases in its European/African/Russian/Caspian business segment.

Not to be outdone, SLB also reported sizable gains in earnings for the fourth quarter and full year. Taken as a whole, Schlumberger reported a 22% pop in earnings[9] vs. 2012’s fourth-quarter numbers. This performance now makes the second straight quarter of 20%-or-better EPS gains.

And like HAL and BHI stock, SLB owes the pop in earnings to continued strength in its international divisions. In fact, North America was actually a drag on Schlumberger’s total profits.

With the three big oil stocks now reporting earnings, the trend is clearly in favor of rising international demand. The truth is that many of the newest and largest finds have actually come from overseas. Spending by E&P firms in the international space currently represents roughly 75% of their total capex budgets. And with analysts at Barclays estimating that total capex by oil stocks will hit $723 billion in 2014[10], that’s some serious bets on international oil.

Buy Recommendation

For investors, the choice is clear — you need to focus globally when it comes to oil stocks. North American-focused oil stocks like C&J Energy (CJES[11]) and Basic Energy Services (BAS[12]) might not be up to snuff in such a highly challenging pricing environment.

With the bulk of its revenues coming from international sources, investors might want to give the nod to SLB stock. Schlumberger already is a big player in several key emerging markets and offers plenty of exposure to their growth.

SLB stock currently trades at 13 times expected 2014 earnings, and also yields a modest 1.8%. That’s not as attractive a valuation as rival HAL, but it deserves a slight premium considering its status as the international oil services king.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.